Insurance: Chapter 9 Flashcards
What four conditions must group life insurance meet?
- It must provide a general death benefit excludable from
gross income - Must be provided to a group of employees as compensation
for personal services performed as an employee - Insurance must be provided under a policy carried directly
or indirectly by the employer - Amount of insurance provided to each employee must be
computed under a formula that precludes individual
selection of death benefits
What is a group permanent (nonforfeitable) life insurance policy?
It does not meet the requirements to be treated as a group term life insurance. The employee will be taxed on the premiums paid by the employer if the proceeds are payable to the beneficiary named by the employee.
Premiums are deductible by the employer
What is dependent coverage?
Group term coverage on the lives of the employee’s spouse and dependents is not included in the $50,000 exemption. However any coverage under $2k is tax free and anything over $2k the employee pays tax on the premium.
What are the income tax implications for group term life insurance?
Group term life insurance is a benefit provided by an employer to a group of participating employees, and employees are generally not taxed on premiums paid by the employer if total coverage doesn’t exceed $50k.
If the coverage does exceed $50k the employee is taxed on the cost of coverage over $50k minus the amount paid.
What are discriminatory group life plans?
The $50k exclusion is available if the plan doesn’t discriminate in favor of key employees. If the plan is discriminatory, each key employee must include the greater of the actual cost of insurance or the cost determined from table 1.
What is true for tax deduction about permanent group life insurance for employers?
If the employee’s rights to the insurance on their life is nonforfeitable, the employer can deduct the premiums. If it is forfeitable they cannot deduct the premiums.
How is group life insurance usually offered to all employees?
As a flat amount typically $50k, or as a multiple of salary
Who owns the group life insurance policy? Who names the beneficiary?
The employer owns the policy, the employee names the beneficiary and this causes the death benefit to be included in the employees estate.
Is it possible for an employee to assign all incidents of ownership in a group term policy?
Yes, incidents of ownership include the right to name or change a beneficiary, right to convert the policy, right to terminate coverage.
If the employee complete an absolute assignment during their lifetime (give up all rights) they will be deemed not to have retained any incident of ownership and after 3 years death benefits will be excluded from their estate.
What is a conversion analysis?
Any employee whose group life insurance coverage ceases has the right to convert to an individual life insurance policy. Conversion can be made to any type of permanent plan and no proof of insurability is required. The premium will reflect the insured’s age at conversion
What are carve out plans?
An employer removes or carves out one or more highly compensated employees from the life insurance coverage and provides them with an individual policy.
What are the 3 structures for individual policies under carved out plans?
- Split dollar
- IRC Section 162 bonus plan
- DBO (death benefit only)
What is the IRC section 162 bonus plan?
The employee purchases and owns the life insurance on his or her life. The employer pays the premium, they are deductible to the employer and are considered a bonus to the employee and are taxable income
Why are group disability plans used?
They tend to be less expensive than individual plans, however they are likely to carry dual definitions of disability. Short term are less than 30 days and long term is 30 days up to 2 years.
What is the definition of disability?
For short term policies, basically it means cannot work.
For long term, total disability means 2-5 years of own-occupation and thereafter modified any-occupation
